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Survey Reveals Global Sourcing Trends

A survey last month of lawyers within key markets within the U.S., Europe, and Asia offices of the international law firm of Morrison & Foerster’s Global Sourcing Group sheds new light on the state of global outsourcing in 2007.

A year ago, the firm predicted the further expansion of business process outsourcing (BPO), the growing maturity of the offshore market, and the growth of multi-sourcing over “mega-deals.” Those trends are expected to continue this year at a faster pace and with slight—and interesting—changes.

For example, while the number of the deals valued at $1 billion or more declined (from 25 in 2004 to 8 last year, according to outsourcing consultancy TPI), most new outsourcing contracts are shorter and smaller, as outsourcers pick and choose their suppliers.

Among the observations: Outsourcing remains a buyer’s market thanks to increased competition from service providers at all levels. Customers are now able to pick from a variety of suppliers, allowing them to pick “best of breed” providers that match their needs. In fact, customers are increasingly using multiple sources instead of awarding all their work to a single outsourcer. Such an approach increases the governance burden, but customers seem willing to pay the price (estimated at 8 to 15 percent of their project’s cost).

Those contracts are no longer automatically going to the largest, Tier-1 service providers, either, possible because, as Morrison & Foerster’s report notes, deals are taking longer to close. Furthermore, “there is a clear difference in approach between offshore-origin service providers (who remain fleet-of-foot and prepared to meet customers’ expectations in order to close deals quickly) and larger (especially Tier-1) providers (who appear to have developed increasingly protracted and convoluted sign-off procedures and are reluctant to move away from their own pre-determined policy positions).”

What are customers most likely to outsource? BPO’s in the lead, but front- and back-office human resources outsourcing hasn’t grown as much in the firm predicted last year, “not least because service providers have struggled to deliver the savings and performance and the profit margins have also been poor.” Expect finance and accounting projects to be likely candidates for outsourcing this year. CFOs, having compliance regulations (such as Sarbanes-Oxley) under greater control, are now examining their internal processes as outsourcing candidates.

The Offshore/Onshore Divide

The offshore/onshore divide appears to be closing. “More and more deals now involve an element of offshore delivery and we have also seen key offshore service providers coming onshore to win business.” The firm notes that “many of the Indian-origin service providers now have delivery centers in all the key geographies. This has helped them win more deals from the Tier-1 service providers and to move beyond their typical strengths in applications development and maintenance (ADM).”

China is an up-and-coming provider. Morrison & Foerster report that India currently has a cost and language advantage, but China is closing the gap. In fact, they report, “analysts have recently claimed that between 5 to10 percent of U.S. and European IT software outsourcing will be diverted from India to China in a few years time,” especially for application development and maintenance, because of its cost advantage. Ironically, many deals made with Indian service providers includes work that is performed in China, a trend that’s expected to continue.

The traditional concerns about data security and privacy remain, something the firm says it will continue to monitor.

While the United States and the UK are the leading outsourcers, expect growth in deals from continental Europe. While Asia remains a key location where work is done, “there are signs that some Asian companies are beginning to look at elements of what might typically be seen as ‘Western-style’ outsourcing, especially in Japan.

About the Author

This article is courtesy of Enterprise Systems. James E. Powell is editorial director of ESJ.com.

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